You knew it was going to happen.
Japan adopted an "official" 2% inflation target. At the same time the so-called "independent" BOJ said it will begin open-ended money-printing starting in January of next year, when it will begin buying a total of 12 trillion Yen of government bonds monthly.
This is about $135 billion in dollars, more or less, per month -- or about $1.6 trillion annually.
The market initially spiked on this, but then people started to contemplate: This is a fiscal devaluation of about 22% annually!
That's well beyond eating the seed corn and into the realm of burning the furniture -- and perhaps the wallpaper.
The impact of this policy on the common Japanese citizen is going to be catastrophic and will lead to the collapse of the economy and government. This is not speculation; it is mathematically certain. We are talking about a "fiscal operation" that is approximately three times what our government is doing, and the impact here has been horrifying, boosting unemployment and pressing firmly into the neck of Americans while driving food stamps and other social "program" demand to the moon.
The impact in Japan will be nothing short of cataclysmic, which leads one to wonder: Are they really that dumb or is this a promise that nobody intends to actually keep?
The market seems to believe the second -- for now. I don't blame traders either -- it doesn't take long for me to pull out my trust HP12c and figure out the fiscal impact, nor to do a back-of-the-envelope on what this will do the common Japanese citizen. There aren't enough non-radioactive sticks left in the country to hand out for tongue-biting protection on this deal -- short of an intent to wind up in a hot war (probably with China) my only reaction to this announcement is "You must be lying -- or nuts!"
We're boxed into the same corner here in America, incidentally. The House appears to be prepared to once again play "kick the can", basically postponing the debt ceiling issue for three months in a gambit to try to force The Senate to do its Constitutional job and pass a budget.
This won't matter. Without putting a stop to deficit spending the spiral of exponential growth in debt will continue and this cannot continue on anything approaching an indefinite forward horizon. Obama's first term added roughly $6 trillion dollars to the National Tab, expanding it by some 60%. Trying to do that again over the next four years, which is exactly where we're headed at an accelerating rate, is going to wind up leaving us in the same box that Japan is in but with much higher levels of government dependence at the starting gate, which means that the fiscal demands will be even more-severe than they are for the Japanese.
This will not work and no agenda to "promote growth" will fix it either; you cannot grow out of this just as we didn't during the 1980-2007 time frame -- debt increased at a rate of about 3% more than GDP did over the entire period, irrespective of the claims otherwise.
The numerical facts are what they are. I would like to believe in various machinations and their ability to produce outcomes that are desirable, but I have to cede "desires" to arithmetic. Irrespective of what I want or anyone else wants to believe in, the math cannot be argued with or bargained against -- it is not a political creature and does not respond to political incentives, including bribes.
The Senate, to a large degree, knows this and "gets it." I'm certain of it, having spoken with the staff of a few folks in that chamber. I'm not sure The House leadership does, but if they don't they had damned well better figure this out and then figure out how to deal with it.
This much I know for certain -- The Senate won't raise this until and unless The House is on board, because it's political suicide to do so without a sizable caucus behind it. It's one thing to sacrifice one's political career to do the right thing -- it's another to do so pointlessly when there is nobody standing with you and as such you will accomplish nothing by personally taking the pipe.
I have long been a critic of Ryan's budget proposals as they simply refuse to accept the drivers of the deficit in this country and what has to be done to fix it. There's a new version, I'm sure, of Ryan's follies on the way through the pipe and it will be interesting to see if there's any hint of recognition of those drivers in it. I doubt it, simply because there has been no evidence that reality has yet intruded in The House leadership.
Here's the problem, in short: The time to get in front of this problem has already run; that was back in 2007 and 2008. Now, four years and a 60% increase in Federal Debt later, the exact outcome that was inevitable has become realized -- but the worst of the consequences has thus far been forestalled by adding huge numbers of people to the public dole.
To those in The House who think we can get through this on the path we're on: You're wrong.
The political calculation is now much more-perilous, and comes down to this:
If we don't stop this foolishness the odds of a fiscal crisis of some sort in the next two years is extremely likely and within four nearly certain. If you get the timing wrong then Pelosi gets the gavel back in 2014 and we're utterly screwed across the board.
So to the leadership in The House, I leave you this: You're not kicking the can, you're kicking yourselves in the balls. Stop it -- that's stupid -- and start dealing with the actual drivers of this problem now.
Where We Are, Where We're Heading (2013) - The annual 2013 Ticker
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